Business Context and Reporting Period
Company: Fresenius Medical Care AG & Co. KGaA
Filing Type: Form 6-K (Interim Report)
Reporting Period: Three and nine months ended September 30, 2010
Business Overview: The Company is the world's largest kidney dialysis company, providing dialysis services and manufacturing/distributing products for end-stage renal disease (ESRD). Operations are segmented into North America and International (aggregating Europe, Latin America, and Asia-Pacific).
Key Financial Metrics (Nine Months Ended Sept 30, 2010)
| Metric | 2010 (9 Months) | 2009 (9 Months) | Change |
|---|---|---|---|
| Net Revenue | $8,886 million | $8,212 million | +8% |
| Operating Income | $1,385 million | $1,265 million | +9.5% |
| Net Income (Attributable to FMC) | $707 million | $645 million | +10% |
| Operating Margin | 15.6% | 15.4% | +0.2 pts |
| Cash from Operations | $1,027 million | $880 million | +17% |
| EBITDA | $1,754 million | $1,599 million | +10% |
| Capital Expenditures | $339 million | $388 million | -13% |
| Acquisitions (Cash Used) | $247 million | $109 million | +127% |
Balance Sheet Highlights (Sept 30, 2010)
- Total Assets: $16.7 billion (up from $15.8 billion at year-end 2009).
- Cash and Cash Equivalents: $572 million.
- Working Capital: $1.576 billion.
- Debt/EBITDA Ratio: Targeted to remain below 2.5x.
Material Changes vs. Prior Period
- Revenue Growth: Driven by an 8% increase in dialysis care revenue (due to same-market treatment growth of 4% and revenue per treatment increases) and a 4% increase in dialysis product revenue.
- Segment Performance:
- North America: Operating income rose 13% to $1.014 billion, with margins improving to 16.7% due to higher revenue per treatment and economies of scale.
- International: Operating income rose 5% to $480 million. Margins decreased slightly to 17.0% due to lower margins in recently acquired clinics and hyperinflation impacts in Venezuela.
- Costs: SG&A expenses increased to 17.8% of revenue, primarily due to higher personnel expenses and donations in North America, partially offset by economies of scale internationally.
- Tax Rate: Effective tax rate increased to 34.7% from 33.2%, influenced by a favorable tax benefit recognized in 2009 that did not recur.
Guidance, Outlook, and Risks
2010 Full Year Outlook
- Net Income: Increased estimate to $960 - $980 million (previously $950 - $980 million).
- Net Revenues: Expected to exceed $12,000 million.
- Capital Expenditures: Estimated at $550 - $650 million.
- Acquisitions: Expected up to $500 million.
Key Risks and Contingencies
- Medicare PPS Implementation: A new bundled prospective payment system (PPS) for dialysis begins January 1, 2011. The Company expects a lower average reimbursement rate but has elected to be fully subject to the new system. Mitigation strategies include protocol changes and cost savings negotiations.
- Healthcare Reform (ACA): The Patient Protection and Affordable Care Act introduces fees on pharmaceutical companies and a medical device excise tax (starting 2013), which will adversely impact product business earnings.
- Legal Proceedings:
- IRS Litigation: Ongoing disputes regarding disallowed tax deductions for civil settlement payments and intercompany preferred shares could materially impact liquidity if resolved adversely.
- Patent Litigation: Ongoing disputes with Baxter International regarding hemodialysis machine patents; recent rulings have invalidated some claims, but appeals continue.
- W.R. Grace Settlement: A $115 million payment obligation related to the W.R. Grace bankruptcy settlement remains pending plan confirmation.
- Acquisition: Signed an agreement to acquire Gambro's worldwide peritoneal dialysis business, subject to regulatory approval.
Investor Verification Checklist
- PPS Impact Analysis: Verify the Company's specific modeling of the 2011 Medicare bundled payment system impact on North America margins.
- Tax Litigation Exposure: Review the status of the IRS disputes regarding the 1997 impairment and intercompany preferred shares to assess potential cash outflows.
- Acquisition Integration: Monitor the integration of the Gambro peritoneal dialysis business and the impact of recent international clinic acquisitions on margins.
- Debt Covenants: Confirm compliance with the amended 2006 Senior Credit Agreement, specifically the leverage ratio and dividend limitations.
- Days Sales Outstanding (DSO): Track DSO trends, particularly in the International segment, where payment delays from government entities have been noted.